Why Corporate Tax Cuts Won’t Create Jobs

In today’s New York Times we discovered this opinion piece by a young American entrepreneur that exactly mirrors our own, so we are posting it. Thomas Picketty in his definitive work on economic inequality, Capital in the Twenty-First Century, has said essentially the same thing, and we have quoted him on it several times. But we thought you might like to hear it from an American who has been in the trenches of American business.

In the coming weeks we will hear the opposite position expressed again and again by politicians and the Administration as a major reason for their proposed tax cuts. Don’t believe them.

By MARCUS RYU, Oct. 9, 2017 for The New York Times

The tax cut framework recently put forward by President Trump relies on a central claim: that reducing taxes on corporations and wealthy individuals will open the wellsprings of entrepreneurship and investment, turbocharging job growth and the American economy. Were this premise true, reasonable people might countenance giving a vast majority of benefits to the very rich, as Mr. Trump’s plan does, in exchange for greater prosperity for all. But it’s not.

I am what certain politicians call a “job creator.” Two recessions ago, in 2001, five partners and I founded a software company in Silicon Valley. After great difficulty and great good fortune, that company grew to serve customers in over 30 countries, generating over $500 million in annual revenue and employing more than 2,000 professionals in high-skilled, high-paying jobs — a large majority of them in the United States. Today I am the chief executive of that company, Guidewire Software, valued on the New York Stock Exchange at over $5 billion.

As an entrepreneur myself and a friend to many others, I know that lower tax rates will not motivate more people to start companies. People start companies for many reasons: a compelling idea, ambition for fame and fortune, a desire to be one’s own boss, frustration with one’s employer. I have never heard someone say, “I would have started a company, but tax rates were too high” or “I wouldn’t have started this company, but then George W. Bush cut tax rates, so I did.”

While I can imagine tax regimes that would create disincentives for entrepreneurship, we don’t have that situation today in America, where tax rates on capital gains (the primary way that founders of successful start-ups make money) are already far lower than rates on ordinary income. Indeed, some of the most admired entrepreneurs — Bill Gates, Steve Jobs, Jeff Bezos — started their companies under significantly higher tax regimes. This is consistent with empirical research; the economists Robert Moffitt and Mark Wilhelm, for example, found that the large cuts in marginal tax rates in 1986 did not induce high-income men to work longer hours.*

The job-creation reasoning is equally specious when applied to the behavior of existing companies. As Warren Buffett notes, “I have yet to see” anyone “shy away from a sensible investment because of the tax rate on the potential gain.” My team and I are already intensely motivated to expand the company we manage, and lowering the corporate tax rate isn’t going to make us create jobs any faster.

What a tax cut would do is increase our post-tax profitability, which effectively transfers money from the federal government to our shareholders. One consequence of this would likely be a one-time increase in our stock price, but with no impact on our operations or employment plans. In theory, this could have the benefit of making it easier to raise cash by issuing more stock to the public, but with interest rates at historical lows for years, American corporations have had no trouble getting capital.

In other words, if we are serious about growth, competitiveness and job creation, we should look elsewhere besides the tax code for answers. We can remain open to immigrants in search of better economic opportunities. We can invest in our public schools and universities. We can upgrade vital business infrastructure such as airports, land transportation systems, the internet backbone and our power grid. We can heighten our vigilance about anti-competitive behavior and regulatory capture by very large corporations that make it difficult to start new businesses.

There have been two recurring themes in my conversations about the tax-cut proposal with my Silicon Valley business peers, both Republican and Democrat. The first is derision about the shoddy business reasoning: Well-run companies don’t just spend recklessly with no plan or intention to stop if revenues don’t come in as hoped. But this is exactly what the tax-cut proposal does by wishing away huge tax-revenue shortfalls with stupendous growth projections. The second theme is shoulder-shrugging — after all, didn’t voters effectively ratify an agenda of tax cuts favoring the very wealthy?

I’m not sure, but I choose to believe not. By 2027, when they are fully phased in, four out of every five dollars in proposed tax cuts will flow to the top 1 percent, an egregious wealth transfer to those who least need it.

I am an entrepreneur and a businessman, but I am also a citizen. I believe tax cuts that deepen our already severe inequality in income and wealth are not in the long-term interests of any citizens, not even the very wealthy. Extreme inequality is corroding our civil society, poisoning our politics, and undermining our effectiveness as a nation. This is an extremely hard problem to solve, but when you’re in a deep ditch, the first thing to do is stop digging.

Marcus Ryu is a co-founder and the chief executive of Guidewire Software, a maker of software for the insurance industry.

*Quoted from Robert Moffitt and Mark Wilhelm, Does Atlas Shrug? The Economic Consequences of Taxing the Rich ( published 2000):

“A long standing issue in the effects of taxation concerns whether labor supply, most commonly measured by hours of work, responds to taxation. We have examined whether high-income men—the rich—so respond. High-income taxpayers are often thought to have more opportunities to respond to tax law changes and have greater incentive to do so because of their high marginal tax rates. Our analysis of changes in the hours of work of such men between 1983 and 1989, in response to the marginal tax rate reductions legislated in the 1986 Tax Reform Act**, find essentially no evidence of any such response. We speculate that this is partly a result of the fact that these men are already working such long hours (often more that three thousand per year) that there is little remaining opportunity for response.”

**1986 Tax Reform Act: under President Reagan, the top tax rate for individuals for tax year 1987 was lowered from 50% to 38.5%